Wednesday, August 14, 2019

Economic outlook boosted by postponed tariffs - for now; European figures released today

  • China
  • Dollar
  • Gold
  • Euro
  • Oil

Market recap: The USTR declares additional tariffs will be delayed until December

Stocks surged on Tuesday, after the US postponed proposed tariffs on certain Chinese imports. The United States Trade Representative (USTR) announced products including clothes, toys, laptop computers and cellphones will be removed from the tariff list because of, “Health, safety, national security and other factors,” and will not face additional tariffs of 10%. Other tariffs will be delayed until December 15th for certain goods. The announcement led to a more optimistic outlook from the market regarding the ongoing trade war between the two superpowers, with experts claiming these products are being used as a buffer between Washington and Beijing to lessen the impact on the US economy. President Donald Trump said yesterday the decision has been taken to help the US’s Christmas shopping season.

China’s state-run news outlet Xinhua also confirmed that both countries’ negotiators liaised on the phone yesterday, and agreed that trade talks will continue in two weeks’ time. The People’s Bank of China fixed the Chinese yuan reference rate at 7.0312 per dollar this morning (prior fix: 7.0326; prev close: 7.0558), which was stronger than expected, while the onshore Chinese yuan is also now floating below 7-per-dollar level. Asian stocks bounced back as a result, with Shanghai’s Composite Index and Hong Kong’s Hang Seng Index opening at 0.6% and 0.5% respectively.

The US’s CPI for July increased 1.8% yesterday, while its inflation rate went up 2.2%. The core CPI rate has been stable for the past 17 months, and has remained above the Fed’s 2% target. The overall CPI was up 0.3% for the month, beating expectations of a 0.2% increase. The rate-friendly figure pushed the dollar index to rise to 97.80’s level.

Today’s analysis: Euro and sterling in the spotlight

Tensions between the two superpowers look to have softened, as Trump seems to appreciate that implementing tariffs on almost all imports from China will severely damage the US economy and the standard of living for Americans. But the trade war is still expected to rage well into 2020, and tariffs already in place are slowing down global economic growth while directly affecting the US’s economic outlook, plus the Fed’s philosophy towards its monetary policy.

The extension of Huawei’s temporary licence (which allows the company to support its existing products that are already on the market), along with imports of US agricultural products in China, will be key trade war topics today. The phone maker’s temporary 90-day licence expires on August 19th.

Meanwhile, the dollar index’s outlook is still bright. Yesterday’s CPI figure again supported the Fed’s decision not to lower the rate too quickly (and helped the dollar index reach higher), while Europe and the UK in particular are expected to suffer for the rest of 2019 from the current global economic slowdown. Market sentiment is that this pressure will send the euro and sterling to a lower level, passively supporting the dollar index.

The German ZEW headline numbers for August were released yesterday, and revealed that the economic sentiment index dived to -44.1, a much lower number than the expected -28.5. The Eurozone ZEW economic sentiment for August also sank to -43.6 (vs -21.7 expected and -20.3 prior). The Germany GDP for Q2 confirmed no change year-on-year, which added to the gloomy outlook for Europe’s economic growth.

At GMT+4 12:30pm, the UK will release its CPI for July, with the market predicting a decline from 2% to 1.9%. Sterling may drop to reach 1.2’s level should that be the case, as it may cause the Bank of England to stay or even lower the rate because of uncertainty surrounding Brexit. At GMT+4 13:00, the preliminary Eurozone GDP for Q2 will be released, with market consensus hinting at 1.1%. That figure will confirm the slowdown of Europe’s economic growth, which could see the euro reach lower in today’s session.